Economy

Price gains are set to be a key focus for markets this week, particularly when January’s personal consumption expenditures price data is released on Thursday.Recent figures pointed to sticky inflation in the world’s largest economy in January, a prospect that has all but extinguished bets that the Fed will move imminently to bring interest rates down from more than two-decade highs. The central bank previously embarked on a tightening campaign designed to ease inflation back down to its 2% target, but prices are still well above this mark.Meanwhile, in an interview published on Friday, New York Fed President John Williams sounded some caution around the possibility of early rate cuts, saying that the Fed is on track to reduce borrowing costs “later this year.”In a note to clients dated on Friday, the Citi analysts said that a cut in June is their “base case.””Fed officials reiterated that rate cuts will be done ‘carefully’ and seem to be taking January inflation data seriously but not literally,” the analysts noted. More

TOKYO (Reuters) – A former adviser to late Japanese Prime Minister Shinzo Abe on Sunday voiced opposition to ending negative interest rates any time soon, saying premature action by the central bank would push the economy back into deflation.Speculation is rife that the Bank of Japan may ditch negative rates as early as March or April given expectations that major firms will offer higher pay rises at annual spring labour-management talks due to wrap up March 13.However, small firms, which conclude wage talks by June, have a high ratio of workers’ share of corporate profits, making it difficult to raise wages further.”While uncertainty is high, (I) oppose (ending negative rates.) It’s too early,” Etsuro Honda (NYSE:HMC), former special advisor to the cabinet, told Reuters.”Negative rates are used for inter-bank operations, which apply risk premiums when it comes to corporations where no one’s asking for borrowing with negative rates,” he said. Honda still wields influence with policymakers and lawmakers.Last week, he was invited to lecture a gathering of lawmakers led by Sanae Takaichi, a former policy affairs chief at the ruling Liberal Democratic Party and seen as potentially Japan’s first female prime minister. Honda was an architect of the stimulus policy dubbed ‘Abenomics’ – a mix of bold monetary easing, flexible fiscal policy and reform, which helped the economy escape more than a decade of deflation. However, the policy has failed to achieve the central bank’s 2% inflation target. More

ABU DHABI (Reuters) – Lebanon’s long-troubled economy is shrouded in uncertainty by conflict on its southern border between Israeli forces and Hezbollah militants, Lebanon’s economy minister said on Monday.Minister of Economy and Trade Amin Salam told reporters in Abu Dhabi that Lebanon would miss an annual growth forecast of 2-4% this year as a direct result of the cross-border strikes.”Lebanon is in a state of lot of questions now but definitely things are declining in a negative way,” he said on the sidelines of a World Trade Organization (WTO) meeting.He said it was unclear if visitors from the Lebanese diaspora and other tourists, who he said injected about $5-7 billion into the economy last summer, would come to the country this season.The recent winter season had seen fewer overseas visitors than expected after a strong summer season before the war, he said. The U.S., Brazil, and Australia, home to many Lebanese, are urging their citizens to reconsider travelling to Lebanon.”We don’t know really if in the next few months we can look at a summer season that will pump back billions of dollars into the economy,” he said, uncertain if the diaspora will stay away.Israeli forces and Lebanon’s Hezbollah have for months traded fire across Lebanon’s southern border, which the Iran-backed group says is in support of its Palestinian ally Hamas.Hamas launched a cross-border attack on Israel from Gaza on Oct. 7 that left around 1,200 people dead, with more than 200 taken hostage, of which around 100 have been released.In retaliation, Israel has bombed and invaded Gaza with the aim, its government says, of destroying the Iran-backed Hamas, which rules the coastal enclave of some 2.5 million people. The military operations have killed more than 29,000 Palestinians.”Lebanon is not just affected by the war in Palestine and Gaza. Lebanon is in a state of war. We are losing our land,” Salam said. Salam said the southern border fighting had weakened Lebanon’s exports with about $2.5 billion in agricultural land, trees and goods damaged or destroyed so far in the strikes.He said the government was seeking international assistance to rehabilitate farmland damaged by the fighting.”It will take years and it will take a lot of money, so definitely we will be seeking international community to aid us in rehabilitating all the areas,” Salam said.Lebanon’s economy began to unravel in 2019 after decades of profligate state spending and corruption. More

1. Futures lowerU.S. stock futures edged lower on Monday, as investors eyed the staying power of an artificial intelligence-fueled tech rally and the prospect of delayed Federal Reserve interest rate cuts.By 03:11 ET (08:11 GMT), the S&P 500 futures contract had shed 8 points or 0.2%, Nasdaq 100 futures had dipped by 43 points or 0.2%, and Dow futures had lost 35 points or 0.1%.The main averages on Wall Street were mixed on Friday. The benchmark S&P 500 and blue-chip Dow Jones Industrial Average both edged up to fresh record closing highs, buoyed in part by ongoing strength in AI-darling Nvidia (NASDAQ:NVDA). The chip designer’s market capitalization briefly crested $2 trillion for the first time in the prior session.Despite a modest dip in the tech heavy Nasdaq Composite, all three of the indices ended the week higher.2. U.S. inflation data, more earnings ahead this weekU.S. inflation will likely remain a key focus for markets this week, particularly when January’s personal consumption expenditures price data is released on Thursday.Recent economic figures have pointed to sticky price gains in the world’s largest economy, a prospect that has greatly extinguished bets that the Fed will move imminently to bring interest rates down from more than two-decade highs. The central bank has previously embarked on a tightening campaign designed to ease inflation to its 2% target, and although prices have cooled, they are still above this mark.In an interview published on Friday, New York Fed President John Williams sounded some caution around early rate cuts, saying that the Fed is on track to reduce borrowing costs “later this year.”The weekly economic calendar also features data on durable goods orders, the ISM manufacturing purchasing managers’ index, readings on new and pending home sales, as well as reports on consumer confidence from the Conference Board and the University of Michigan.On the earnings front, DIY retailer Lowe’s (NYSE:LOW), cloud software group Salesforce (NYSE:CRM), and tech company Dell Technologies (NYSE:DELL) are due to report this week.3. Buffett reassures investors, remembers Charlie MungerBillionaire investment icon Warren Buffett told investors that his $900 billion conglomerate Berkshire Hathaway is “built to last” through even the worst financial disasters.But in his closely-watched annual shareholder letter released over the weekend, Buffett noted that Berkshire’s share price will likely not see any “eye-popping” performances due to its already massive size. He added that only a handful of firms are capable of “moving the needle” at Berkshire, “and they have been endlessly picked over by us and by others.”Berkshire posted a record $37.4 billion in operating profit in 2023, bolstered by a 28% jump in fourth-quarter income to $8.48 billion.Buffett also took time to honor his long-time colleague Charlie Munger, who passed away in November at the age of 99. Buffett called Munger the “architect” of Berkshire.4. Ant Group outbids Citadel for Credit Suisse’s China unit – BloombergJack Ma-backed fintech Ant Group outbid Citadel Securities for Credit Suisse’s investment bank unit in China in a move that is expected to attract a heavy dose of regulatory scrutiny, Bloomberg reported on Monday.Ant is looking to build a securities business using the division, although people familiar with the matter told Bloomberg that Chinese authorities will be more inclined to favor a foreign buyer for the unit.The Bloomberg report did not specify the value of Ant’s bid. Citadel, founded by billionaire Ken Griffin, had reportedly offered between 1.5 billion yuan ($210 million) to 2 billion yuan for the business in late-2023.Ant’s approach may present some trouble for Swiss bank UBS Group AG (NYSE:UBS) (SIX:UBSG), which took over smaller peer Credit Suisse last year. UBS must find a buyer for the Chinese unit, given that it already controls a securities firm in China and cannot hold two licenses in the same business, Bloomberg reported.5. Oil prices dipOil prices fell in European trade on Monday, extending steep losses from the prior session that were driven by uncertainty over demand.Traders are focused on a string of key economic readings this week, as well as more signals from the Federal Reserve on the path of interest rates.Worries over slowing demand, especially after recently hawkish signals from the Fed, were a key weight on crude prices last week, dragging them down by about 3% lower on Friday and also wiping out all gains for the week. These concerns largely outweighed signs of continued geopolitical instability in the Middle East, which have exacerbated fears of supply disruptions, offering some support to oil prices.Brent oil futures expiring in April fell 0.5% to $81.23 a barrel, while West Texas Intermediate crude futures dropped 0.5% to $75.70 per barrel by 03:10 ET. More

Meanwhile Ukraine marks the second anniversary of Russia’s invasion. Here’s your week ahead in world markets from Rae Wee in Singapore, Lewis Krauskopf in New York, and Dhara Ranasinghe, Mark John and Karin Strohecker in London.1/OUTSTRIPPING EXPECTATIONSU.S. inflation is back in the spotlight on Thursday, with the personal consumption expenditures (PCE) price index set to give investors another look at an economy that has been stronger than many had expected.Recent data such as consumer prices, producer prices and employment show the world’s largest economy continues to hum along despite months of elevated interest rates. One upshot has been an increasingly cautious Fed pushing back on expectations of an imminent rate cut. Bond yields have rebounded and the dollar has edged higher.Economists polled by Reuters expect a 0.3% increase for January after 0.2% in the previous month. A stronger-than-expected PCE number could further whittle away at market rate cut bets. 2/ HAPPY DAYSThe European Central Bank must be pleased, surely? Upcoming flash February numbers on March 1 should show euro area inflation, which soared to double-digits in 2022, is moving back towards its 2% target. The reading slipped to 2.8% in January from 2.9% in December and is cooling quickly with growth anaemic and retreating energy prices.The composite reading will follow national data from Germany, France and Spain – all out before the ECB meeting on March 7. ECB vice-president Luis de Guindos says time and more data are needed before policymakers can say comfortably that record-high rates have done their job. Wage growth meanwhile has slowed but remains above levels consistent with 2% inflation.So, it is not quite happy days as rate setters navigate that tricky ground between keeping rates high enough to contain inflation while timing a first rate cut just right.3/ A TOUGH ACT Policymakers in China and Japan are facing a tough battle to improve the dour growth outlook in their economies.Inflation figures for Japan are due on Tuesday – and expectations that consumer prices have cooled again in January might give the Bank of Japan (BOJ) one less reason to exit negative rates this year. The central bank faces a recessionary backdrop and sluggish consumer spending, but maintaining ultra-easy policy would mean more pain for the yen.Over in China, authorities have grown increasingly desperate to shore up a fragile economic recovery after delivering the biggest ever reduction in the benchmark mortgage rate and ramping up regulatory pressure to revive an ailing stock market. Friday’s PMI data will provide more clarity on how effective Beijing’s support measures have been. In the meantime, though, investors remain unimpressed.4/ TRADING NOWHERE Rising protectionism and geopolitical conflict have cast a pall over world commerce, which last year grew just 0.2% – its weakest rate in five decades outside global recessions. What can the World Trade Organization, which starts its minister-level meeting in Abu Dhabi on Monday, do about it? Very little, most observers conclude. The body is hampered by disputes among member countries and above all by domestic politics that have turned sour on the free trade, which the WTO was set up to promote. Ahead of November U.S. elections, there is little chance of Washington removing its roadblock on new appointments to the WTO’s top appeals bench – meaning its trade dispute arbitration body will remain idle. Meanwhile, prospects for deals in major sectors, such as farming and fisheries remain dim – meaning trade cannot be counted on to drive the global economy for the foreseeable future.5/ OUTNUMBERED, OUTGUNNED Saturday marked the second anniversary of Russia’s invasion of Ukraine – a conflict that has shaken and shaped not only the country itself but global politics, commodity markets and economies like no other in recent history. Prices for energy and many commodities are back below pre-war levels, though gold – an inflation hedge – is above February 2022 prices. Outgunned, outnumbered and facing growing concerns over the prospect of international aid, Ukraine is coming under increasing pressure. The International Monetary Fund warns that “timely support” for Ukraine from the U.S. and other international donors is needed to ensure the country’s fiscal viability. Heads of the Group of Seven major democracies on Saturday pledged to stand by war-weary Ukraine, and Western leaders traveled to Kyiv to show solidarity. Meanwhile Russia, already severed from global financial system following swathes of sanctions, is facing fresh curbs from Washington, Britain and others following the death of opposition leader Alexei Navalny and the war entering its third year. More

This article is an on-site version of our Unhedged newsletter. Sign up here to get the newsletter sent straight to your inbox every weekdayGood morning. Unhedged is back at full force. Nvidia took up all the oxygen last week, but don’t sleep on Eli Lilly. Strong earnings fuelled by weight-loss drugs have pushed the stock up 32 per cent this year. Citi expects Nvidia and Eli Lilly alone will make up a quarter of S&P 500 earnings growth in 2024. How’s everyone feeling about this rally? Email us: [email protected] and [email protected]. Berkshire and the S&P 500If your entire equity portfolio had to be in either the S&P 500 or Berkshire Hathaway, which would be the better choice?With my colleagues Oliver Ralph and Eric Platt, I put this question to Warren Buffett, Berkshire’s chair, in an interview five years ago. His response:I think the financial result would be very close to the same . . . if you want to join something that may have a tiny expectation of better [performance] than the S&P, I think we may be about the safest.In his latest annual letter to shareholders, which appeared over the weekend, Buffett says something similar but not identical:[We] have no possibility of eye-popping performance . . . Berkshire should do a bit better than the average American corporation and, more important, should also operate with materially less risk of permanent loss of capital.One reason for the modest outlook, Buffett writes, is that his company is so big now — 6 per cent of the S&P 500’s total shareholders’ equity — that there are no companies in the US or abroad that are (a) big enough to make a meaningful impact on Berkshire’s earnings, (b) possible to reliably value, (c) have trustworthy and competent management, and (d) are available at a reasonable price. There are no big moves left to make. A similar story applies to purchasing stakes of public companies. Berkshire is a large conglomerate of high-quality businesses that will just churn along. But shouldn’t the quality make a difference? That is, shouldn’t the safety that Buffett referred to both in the recent letter and in the 2019 interview give the company an edge? If an asset has less risk for the same level of return, you can just leverage it up so it has the same risk and a higher return. You can own Berkshire with some borrowed money. But notice that in the more recent statement, Berkshire is making a comparison to “the average American corporation,” not the S&P 500. The difference is important because an average corporation might go bust; the S&P 500 never will. Some members of the index will peter out, but others will soar. Its diversification makes it intrinsically safer than its average member from the point of view of capital preservation. Buffet’s more recent claim is even more modest than the older one.  I don’t want to read too closely into the wording of either statement, but I do think we should at least take Buffet at his word: there really is no reason to expect meaningful outperformance from Berkshire over the long term. It’s too big. Its ability to provide expensive capital to stressed businesses in moments of crisis must be balanced against the drag on returns from its low leverage and high cash holdings in good times. Buffett is not under-promising so he can over-deliver. He’s just being honest. Berkshire bulls might object that the company has delivered slightly better performance than the S&P since 2019: 15.7 per cent annually to the S&P’s 14.1. That 1.6 per cent difference, compounded over time, could add up to something meaningful. But remember that in the decade before 2019, Berkshire underperformed by about the same small but meaningful margin. It probably just doesn’t matter, from the point of view of long-term returns, whether you own Berkshire or the S&P.Why, then, should Berkshire exist? When a virtual mega-conglomerate can be owned for a few basis points, what is the point of an actual mega-conglomerate? Here we move into non-economic territory. Institutions matter: they can create trust, bind people together, and pass along wisdom and values. Berkshire is such an institution in American life, and my guess is that it does a lot of non-economic good. Back in 2019, my colleague Oliver asked Buffett if he should put Berkshire or an S&P tracker fund into his young son’s college fund. Buffett replied that “I think your son will learn more by being a shareholder of Berkshire.” There is something to that, even if it cannot be translated directly into wealth.Inflation and the money supplyMost economists missed the 2021 inflation spike. Even those who were right that the pandemic economic cycle was different, such as Jan Hatzius of Goldman Sachs, were too sanguine about inflation early on. Equally, the few who correctly predicted inflation’s rise, such as Larry Summers, were too pessimistic about how entrenched it was. Inflation is poorly understood, and devilish to forecast.That said, look at the chart below. It shows a measure of year-over-year money supply growth against the Fed’s preferred measure of core inflation. If you had simply followed what the rapidly expanding money supply was telling you, you’d have seen inflation’s rise perhaps 10 months ahead of time. And you’d have been worrying about inflation a year and a half before Jay Powell said it was “probably a good time to retire” the “transitory” label:You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.Monetarism, the idea that changes in the quantity of money drive inflation, has fallen out of favour in economics. Yet the eerie accuracy of the money supply in predicting the 2021 inflation wave spurred interest in considering money again. As Martin Wolf wrote in 2022: “Just as the financial crisis showed that banking matters, so this inflationary upsurge shows that money matters . . . we cannot steer the economy via the money supply [but] we cannot ignore it either.”Was this conclusion premature? The money supply did not expand in isolation. It coincided with a mammoth fiscal stimulus effort and a global supply chain logjam. These alone might plausibly explain why inflation shot up and then collapsed. That the money supply mattered is not self-evident.In a new paper, two Dallas Fed economists, Tyler Atkinson and Ron Mau, downplay the usefulness of money. Their premise is simple: if money matters, then measures of its growth should be able to forecast inflation better than a rudimentary forecast based on lagged inflation from 12 months before. If money-based forecasts can’t outperform crude extrapolation from inflation’s recent past, what use are they? As it turns out, money-based forecasts fail to outperform lagged inflation. Since 1969, they have done roughly 11 per cent worse in predicting core PCE inflation over the next 12 months. Money-based forecasts occasionally do much worse, too. As the chart below shows, in 2011 the money supply was signalling deflation, while a lagged-inflation-only forecast accurately stayed close to 2 per cent:(One data note: readers are probably most familiar with M2, the classic money supply measure. The problem with M2 is that it adds together very different types of “money”; interest-bearing, locked-up CDs are treated the same as a checking account. The Dallas Fed authors instead use the Divisia measures, which weight payment types based on how cash-like they are, and therefore how much they contribute to economy-wide liquidity.)Atkinson and Mau do concede that money-based forecasts slightly outperform lagged inflation if you look solely at post-2020 data. Why might that be? They offer no explanation, but former New York Fed chief Bill Dudley has. In his interview with Unhedged last year, Dudley told us:M2 is going to be correlated with the shift from QE to QT. But if you go look at M2 growth after the GFC, you saw a lot of QE, you saw rapid growth of M2. And there was no inflation, no consequence for growth. M2 just doesn’t have much relationship to economic activity.People just don’t understand how the Fed’s operating model has changed. Quantities of money don’t really matter very much. What really matters is the interest rate that the Fed sets on reserves.Put another way, in a world where liquidity is everywhere, changes in the money supply don’t signal much about the availability of credit. Whatever link might’ve existed in a pre-QE world is no longer there. So the best explanation of the post-2020 correlation between the money supply and inflation is that it’s largely coincidental. It’s possible that a sophisticated model might extract signal from the money supply data. We’re not saying it doesn’t matter at all. But for investors interested in a quick temperature check of the economy, money may not have much to offer. (Ethan Wu)One good readMcKinsey proves, once again, that it is not good at managing geopolitical conflicts of interest.FT Unhedged podcastCan’t get enough of Unhedged? Listen to our new podcast, hosted by Ethan Wu and Katie Martin, for a 15-minute dive into the latest markets news and financial headlines, twice a week. Catch up on past editions of the newsletter here.Recommended newsletters for youSwamp Notes — Expert insight on the intersection of money and power in US politics. Sign up hereDue Diligence — Top stories from the world of corporate finance. Sign up here More

Even during the first blush of the honeymoon period that attended China’s accession to the World Trade Organization in 2001, it was clear that Washington and Beijing were — as a Chinese idiom has it — “sharing a bed but dreaming different dreams”. Bill Clinton, the then US president, hailed China’s membership as “removing [Beijing’s] government from vast areas of people’s lives” and promoting political reform. Jiang Zemin, China’s then leader, had a different take. He warned that America’s real motive was to “westernise and divide Socialist countries”.More than 20 years later, that early friction has metastasised. The WTO — which holds its biennial ministerial conference this week — has fallen hostage to sharp divisions between the US and China as trade friction escalates between China and the west.As the world trade body falters, China is accelerating efforts to construct an alternative trade architecture that is insulated from US influence and centred upon the developing world. You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.In this, Beijing’s main strategy is to capitalise on ties with the “global south” fostered through its $1tn Belt and Road Initiative (BRI), an investment programme launched in 2013 that counts more than 140 countries in Asia, Africa, Latin America and elsewhere as its participants.The architecture under construction revolves around a China-centric network of bilateral and regional “free trade agreements” (FTAs), which allow for trade at low tariffs while also promoting direct investment flows, Chinese officials and trade experts say. This network — which currently includes 28 countries and territories that take close to 40 per cent of China’s exports — means that if the WTO’s mandate to keep the world open for liberalised trade unravels, China will have at least a partial back-up system in place, they add. None of China’s FTAs include the US or countries inside the EU.“China felt that it needed to construct an alternative system serving its own interests,” says Henry Gao, Professor of Law at Singapore Management University and an adviser to the WTO. “This alternative is mainly based on the BRI, to which China is progressively trying to shift its exports from traditional markets like the US and EU,” Gao adds.China’s push to protect its trade reflects its anxiety about the withering of the post-second world war global trading system, a threat that has intensified since 2018 when then US president Donald Trump slapped hefty tariffs on trade with China. Global trade values are predicted to have shrunk by 5 per cent last year as the number of “trade restrictive measures” — which includes tariffs and non-tariff measures — rose significantly, according to Unctad, a UN development body. President Bill Clinton (R) and Chinese Premier Zhu Rongji during an official visit in 1999. Today, China is accelerating efforts to construct an alternative trade architecture that is insulated from US influence More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.Bond vigilantism is resurgent in the market for sovereign debt. That emerged with remorseless clarity from the brutal sell-off of UK gilts that toppled hapless British prime minister Liz Truss. Could the fiscal disciplinarians of the global investment community now turn their disruptive talents to the US Treasury market?As well as savaging the president of the day, such a challenge could devastate the US’s role as the world’s chief provider of safe assets during global crises, while simultaneously threatening the dollar’s status as the pre-eminent reserve currency.For many, the idea is simply unimaginable. In a recent speech, Federal Reserve governor Christopher Waller declared that flights to the dollar in the financial crises of 2008 and 2020 were “the ultimate vindication that the US dollar is the world’s reserve currency and is likely to remain so”. Well, yes. The dollar is, after all, backed by the world’s biggest, most liquid debt market. It enjoys what economists call network externalities: widespread acceptance engendering wider use. Supported by the world’s largest economy, the currency is a magnet for nearly 60 per cent of all central banks’ foreign exchange reserves. Note, too, that despite the US economy’s shrinking share of global output, the outcome has merely been a genteel decline in the dollar’s relative share of global reserves. That said, governor Waller conspicuously failed to mention the biggest reason for thinking Treasuries are no longer an ultra-safe store of value.This is not the US’s appallingly dysfunctional politics. Nor the weaponisation of the dollar thanks to geopolitics. Nor again the possible competitive threat from other central banks’ digital currency plans. Rather, it is a spiralling public debt now exceeding 97 per cent of gross domestic product, a level not seen since the second world war. The parallel with the immediate postwar period is instructive. The US succeeded in reducing the debt-to-GDP ratio from 106 per cent in 1946 to 23 per cent by 1974. But the debt was mainly domestic, whereas today nearly a quarter is in foreign hands. For about half the time to 1980, real interest rates in the advanced economies were negative. Carmen Reinhart and Belen Sbrancia have estimated that for the US and UK the annual liquidation of debt thanks to those negative interest rates averaged 3 per cent to 4 per cent of GDP a year. That arose from a policy of financial repression involving direct lending by captive investment institutions and banks to government, interest rate caps and capital controls. In the three decades after the war, the growth rate of national output also exceeded the interest rate on government debt for most of the time. Result: phenomenal debt shrinkage.With today’s global capital flows and deregulated markets financial repression would be unenforceable. The Fed has levered up interest rates to help meet a 2 per cent inflation target and ultra-low interest rates are gone. Meantime, the Congressional Budget Office predicts the US deficit will soar by nearly two-thirds in the next decade, with interest payments accounting for three-quarters of the increase. That stems from the morally hazardous debt binge induced by years of ultra-loose monetary policy.Even the Treasury has declared the public debt burden unsustainable. That means its own supposedly safe IOUs — the linchpin of global markets — are potentially unsafe. To remedy that would require fiscal consolidation, meaning debt reduction. Some hope in a polarised US, whether under Joe Biden, Donald Trump or whoever.The demise of dollar dominance has long been predicted, but never happens because other countries cannot match the supposed safety and liquidity of US Treasuries. Yet that logic may fracture in the face of a deep seated problem identified by economists Ethan Ilzetzki, Reinhart and Kenneth Rogoff. They argue the demand for safe dollar debt risks overwhelming the US government’s capacity to back it when the tax base is diminishing. In which case we are in similar territory to the collapse of the Bretton Woods exchange rate regime in the early 1970s, which unleashed two decades of high inflation and enduring financial instability.It is thus safe to predict that the relative fiscal probity of sovereign borrowers will become a more pressing concern of official reserve managers. And, if the vigilantes strike, the nature of a flight to quality will, in the ensuing firestorm, be redefined as fiscally profligate countries are beset by financial crises. Meantime, fiscal conservatives that generate few safe assets will be hit by uncontrollable bond market bubbles. Policymakers should start contingency planning now. More